Insights Article

Safe Harbour

Subject to it being agreed to by Parliament, the announcement recently will provide a safe harbour from sections 135 and 136 of the Companies Act 1993 on the following terms:

Directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next 6 months will not result in a breach of duties if:

in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 pandemic on them or their debtors;

the company was able to pay its debts as they fell due on 31 December 2019; and

the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).

The Government will be asking Parliament to agree that the safe harbour be backdated to the date of this announcement in early April.

COVID-19 Business Debt Hibernation

The Government will be introducing legislation to introduce a COVID-19 Business Debt Hibernation regime to the Companies Act 1993.

The proposed regime is intended to:

encourage directors to talk to their creditors with a view to putting together a simple proposal for putting the business into hibernation;

allow for the directors to retain control of the company, rather than passing control to an insolvency practitioner;

provide certainty to new creditors that they won’t have to repay any money they receive, so as to encourage businesses to continue transacting with businesses in Business Debt Hibernation;

be simple and flexible so that it can be enacted quickly, and businesses can readily apply it to their circumstances without having to obtain legal advice.

Key features of the proposal are that:

directors will have to meet a threshold before being able to access the Business Debt Hibernation regime and putting a proposal to their creditors

creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% (by number and value) agree

there will be a one month moratorium on the enforcement of debts from the date the proposal is notified, and a further 6 month moratorium if the proposal is passed.

Business Debt Hibernation would be binding on all creditors other than the entity’s employees and would be subject to any conditions agreed with creditors. If the creditors reject the proposal, the directors would still have the range of existing options available including trading on, entering voluntary administration and appointing a liquidator.

While a business is in Business Debt Hibernation it would be able to continue to trade, subject to any restrictions agreed with creditors as a condition of entering into it.

In order to encourage businesses to continue to transact with a company that has entered Business Debt Hibernation, it is proposed that any further payments, or dispositions of property, made by the company to third party creditors would be exempt from the voidable transactions regime. This exemption would not extend to related parties.

This means anyone continuing to trade with the company will not have to worry about a liquidator seeking to unwind transactions if the company is later placed into liquidation. This exemption would be subject to a condition that the transaction was entered into in good faith by both parties, on arm’s length terms and without the intent to deprive the existing creditors of the company.

Business Debt Hibernation will be available to all forms of entity with legal personality (not just companies) and entities that do not have legal personality (i.e. trusts and partnerships).

It will not, however, extend to licensed insurers, registered banks and non-bank deposit takers, and sole traders. Sole traders who become insolvent are instead subject to the Insolvency Act 2006 (which covers personal insolvency) because there is no separation between the trader’s business finances and their personal finances.

Additional changes to support business

In addition to the Companies Act changes on BDH and the safe harbour, the following corporate governance changes have also been proposed:

Other insolvency law changes

Bring forward an insolvency-related reform under the voidable transactions regime to reduce the period of vulnerability from 2 years to 6 months where the debtor company and the creditor are unrelated parties.

The Insolvency Practitioners Regulation Act 2019 and the Insolvency Practitioners Regulation (Amendments) Act 2019 are scheduled to come into force on 17 June 2020. Although 17 June remains achievable, and is still being targeted, unpredictability associated with COVID-19 means that implementation may have to be deferred. To cater for unexpected COVID-19-related delays, Cabinet has agreed to allow the commencement of the Insolvency Practitioners Regulation Act 2019 and the Insolvency Practitioners Regulation (Amendments) Act 2019 to be deferred for up to 12 months.

Amend the Contract and Commercial Law Act 2017 so that the provisions in that Act relating to electronic signatures apply to security agreements containing powers of attorney.

Extending statutory deadlines

Registrars will have temporary exemption powers to:

relax the statutory deadlines in some corporate governance legislation (e.g. for holding AGMs, and filing annual returns for example) for companies, limited partnerships, incorporated societies, charitable trusts and other entities

relax deadlines for Registrars under various Acts to carry out certain functions, such as processing applications to reserve company names.

Non-compliance with entity constitutions

Temporary relief for entities (including incorporated societies, charitable trusts, unincorporated associations and other entities) that are unable to comply with obligations in their constitutions or rules because of the impacts of COVID-19 are absolved from doing so until such a time when it is reasonably able to perform it.

In addition, these entities can use electronic communications (including electronic meetings) even if their constitutions or rules do not allow them to.

Insolvency

Insolvency can be a temporary state especially if the company is owed an amount of money that exceeds the amount they owe to their creditors. So trading whilst insolvent is not necessarily illegal if the directors believe they wills have the means to pay their creditors in a reasonable amount of time. (What is your plan to pay all creditors {including all accrued leave] after lockdown? WHAT IS your Definition of a reasonable time? i.e. 18 months as per relief clause). A company is said to be insolvent if it cannot pay its bills as they fall due, or the total of its liabilities exceeds the total value of assets.

Solvency Test

The solvency test has two parts – liquidity and balance sheet – which must be considered before entering into any transaction:

The liquidity part requires the company to be able to pay its debts as and when they arise in the normal course of business.

The balance sheet part relates to the value of the company’s assets being able to exceed the value of its liabilities – including contingent liabilities. In determining whether the balance sheet aspect will be met, Directors must pay regard to:

The most recent financial statements of the company that comply with s10, Financial Reporting Act 1993; and

All other circumstances that the Directors know, or should know, affect, or may affect, the company’s liabilities – including contingent liabilities. Anyone employed by the company that is your relative, or any business that involves your relatives outside of the company are also open to scrutiny. Particularly if forms of preferential treatment are discovered in an audit of the directors affairs.

Directors must ensure that the solvency test will be met by the company immediately following the transaction.

Next Steps

How businesses will access insolvency relief, and the requirements they’ll need to satisfy, will be finalised in the coming weeks.

Preparation is underway of the necessary information and documentation to help directors through the process. This will include forms that directors will be able to use to put proposals to their creditors.

The Companies Office and Business.govt.nz websites will also provide further advice and guidance to both directors and creditors.